Macroeconomic policy instruments and international economy

Fiscal, Monetary and supply-side policies. International and free trade. Protectionism methods.

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  • Created on: 24-05-11 11:53
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Economics Revision
1. Fiscal policy: Taxation and spending decisions of a government. To influence inflation,
growth, employment, performance of particular markers and too stabilise economy.
Expansionary/Reflationary: policy measure to increase AD
Contractionary/Deflationary: policy measure to decrease AD
Discretionary fiscal policy: changes in govt spending and taxation to influence AD
Automatic stabilisers: changes in govt spending ands taxation due to changes in GDP
Budget deficit: government spending > tax revenue (spending > earning)
Budget surplus: government spending < tax revenue (spending < earning)
Balanced budget: earning =spending
Progressive tax: tax that takes higher % of income from the rich
Regressive tax: tax that takes higher % of income from the poor
Government spending:
Capital spending (roads, schools, hospitals)
Current spending (benefit payments, public sector wages)
Direct tax: corporation tax, income tax
Indirect tax: VAT, petrol tax, passenger duty
2. Monetary policy: Central bank/government decisions of rate of interest, money supply
and exchange rate
MPC (Monetary Policy Committee) ­ sets rate of interest inflation aim 2%
To influence AD
3. Supplyside policy: To influence AS
Can increase productive potential and help prevent inflation
Cutting unemployment benefits
more incentive to work because less earned from sitting at home rather than going out to work
(unemployment trap)
Reducing direct taxes
More incentive to work because receiving more money because of less being taxed on income
Increasing education and training
Increase those in work because they have more skills = skilled workforce
Increase labour productivity (output per worker per hour)
Shift AS curve to the right

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Removal of rules and regulations
Increase in exports and imports ­ gets rid of methods of protectionism
encourage competition
Government subsidies
Encourage start up/growth
provide employment
International trade: exchange of goods and services across national borders
UK has an advantage, half way between Asian and US time zone
3 main trading goods are machinery and transport, manufactures and chemicals
+ Enables country to specialise
+ Lower prices and higher quality
+ Greater variety of products
+ Greater competition in domestic markets
+ Larger…read more

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Tariffs: Taxes on imported products
2. Quotas: limit on the supply of a good and service
3. Voluntary export restraint: limit placed on imports from a country with the agreement of
the country's government
4. Foreign exchange restrictions: limiting the amount of foreign exchanges made
5. Embargoes: ban on the export or import of a product
6. Red tapes: time delaying customs to discourage imports
7.…read more


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